What is the taxation of employee stock options?

Member

by bell , in category: Taxation and Accounting , 8 months ago

What is the taxation of employee stock options?

Facebook Twitter LinkedIn Telegram Whatsapp

1 answer

Member

by tavares , 7 months ago

@bell 

The taxation of employee stock options depends on the type of stock options granted: non-qualified stock options (NSOs) or incentive stock options (ISOs).

  1. Non-Qualified Stock Options (NSOs): When an employee exercises NSOs, they are typically subject to ordinary income tax on the "spread" (the difference between the exercise price and the fair market value of the stock on the exercise date) as part of their regular income. The spread is considered compensation and is subject to federal, state, and local income tax, as well as Medicare and Social Security taxes.


Upon selling the stock acquired through NSOs, any additional gain will be treated as a capital gain or loss. If the stock is sold within a year of exercising the options, it is considered a short-term capital gain/loss and is subject to ordinary income tax rates. If sold after a year, it is considered a long-term capital gain/loss and subject to preferential capital gains tax rates.

  1. Incentive Stock Options (ISOs): When an employee exercises ISOs and holds the stock for at least two years from the grant date and one year from the exercise date, the tax treatment may qualify for favorable long-term capital gains tax rates.


No regular income tax is imposed on the exercise of ISOs, but the spread between the exercise price and the fair market value of the stock on the exercise date is considered a tax preference item for calculating the alternative minimum tax (AMT). If the employee falls under the AMT, they may owe additional tax.


Upon selling the ISO-acquired stock, the difference between the sale price and the fair market value on the exercise date is subject to either short-term or long-term capital gains tax rates, depending on the holding period.


It is important to note that tax laws can be complex and subject to change, so it is advisable to consult with a tax professional for specific advice based on individual circumstances.